Do Populist-Led Governments Inevitably Crash the Economy?

“Exchange, exchange.” Beneath the blazing sun, dozens of money changers are selling US dollars on Florida Street, a bustling shopping street in Buenos Aires. Known as arbolitos (“small trees”), they are thriving before the 26 October midterm elections in a country long used to holding the US dollar.

“The optimal moment for purchasing is now,” states a arbolito, declining to give her name. “[The dollar] dropped slightly but it is a fake-out – it will rebound.”

Like her, economic experts from all backgrounds anticipate a depreciation of the Argentine peso once the voting concludes. The president has placed a cap on the peso to control triple-digit price increases and now it remains overvalued and reserves are depleted, causing the national economy stagnant as consumers turn to low-cost foreign goods.

Fertile Ground

The nation represents a unique situation. The country has frequently been hit by sovereign defaults and economic crises and its voters have been receptive for decades to left-leaning populist movements, in the form of the powerful Peronist movement, and now Milei’s conservative populism.

Milei epitomizes populist leadership: charismatic, unconventional, promising forceful measures to wrestle back command of the economy from the establishment on behalf of ordinary citizens.

These key characteristics are shared by his ally to the north, as well as the UK politician, who styles himself as a beer-drinking champion of the common man even though he is a privately educated former stockbroker.

Up until lately, the president’s strategy – including extensive privatisations and severe budget reductions – had won plaudits from the IMF for contributing to bring inflation in check. This plan has something in common with the policies of his political hero Margaret Thatcher, who also saw rising prices as a monster to be defeated, regardless of the consequences.

However financial markets started to doubt in Milei’s radical project in recent months after a poor performance in local polls and multiple corruption scandals. Solely large-scale economic support by the US has prevented what seemed destined to be a full-blown monetary collapse.

Inconsistencies

The vote for Brexit in 2016 arguably had some of the same logic, and its leader, Boris Johnson, dismissed doubts about economic detail with confident resolve to enact public demand in the face of the establishment’s horror.

Farage to date outlined limited plans to paper aside from a call for large-scale removals, which he subsequently seemed to adjust spontaneously. He aims to curb the central bank, possibly ditching its governor, the incumbent, with distrust of a stodgy establishment being a key part of populist rhetoric.

His tax and spending policies seem unsettled: wary of facing criticism for planning reckless spending, he lately dropped a promise for significant tax reductions. His second-in-command, the party chairman, stated they would concentrate instead on reductions in government expenditure.

The opposition hopes this position will allow it to portray the populist as planning to reintroduce austerity – a point the chancellor has emphasized often, comparing it unfavorably to her approach of boosting government spending.

Jo Michell says there exist inconsistencies within the populist platform, as it stands. “The party is funded by affluent backers demanding tax cuts and reduced rules, yet also talking a lot about the grievances of ordinary workers and the loss in manufacturing employment,” he explains. “There’s a tension here between rich backers who want Thatcherism on steroids, and this story of restoring UK employment and reindustrialisation.”

Holding on to Power

Realistically, research suggests populists of any stripe tend to fare well when faced with practical difficulties (though of course every populist leader claims to offer distinct solutions).

Recent research from a leading journal analysed the outcomes of dozens of populist leaders, over more than a century. The study revealed that on average, over the long term, GDP per capita tends to be a tenth less in countries run by populist leaders than in similar economies with more mainstream regimes.

“Financial decline, weakening economic fundamentals and the erosion of institutions usually occur together under populist governments,” contend the researchers.

Another intriguing finding from the study, though, is that even with their negative impacts, these leaders tend to be good at retaining office, lasting on average a considerable time, versus shorter tenures for mainstream politicians.

In other words, it is not clear that even when their policies fail, such leaders immediately pay the price in elections. Like the Brexiters’ promise to regain sovereignty, their appeal reaches beyond everyday financial matters.

Yet back in Buenos Aires, whether the government’s agenda fails or is sustained through foreign assistance, the Argentine people have already paid significant costs.